Now it’s quite clear that whoever fails to surprise analysts with big profits gets it in the neck. If that’s how things are, does Commtouch (CTCH) stand a chance? The company operates in the Internet sector, posts heavy losses, and says it will break even only in a year. Apparently, Commtouch hasn’t much of a chance. Its share, which touched $68 this year (reflecting a market value of $1 billion), has since plummeted by more than 80%, and is still headed downwards.
Addressing analysts after the publication of the company’s financial statements, Commtouch CEO Gideon Mantel said: “We’ll continue to post losses until Q3 2001, when we’ll break even, and in Q4 I expect we’ll start making profits, and big profits at that. Our growth rate is crazy, but I maintain we’ll continue growing at such a pace, at a sales target of $1 billion in 2004, in a messaging market worth $40 billion.”
Mantel’s comments are backed up by figures. Research company IDC, for instance, estimates that the e-mail market will be worth $25 billion by 2005.
At the same time, there’s no certainty that Mantel’s assertions will be translated into reality. Commtouch increased its revenue significantly to $8.1 billion in Q3 (exactly as forecast by investment house Oppehheimer and lower than Piper Jaffray’s forecast), but it continued guzzling cash.
The most worrisome figure for Commtouch is the amount of cash in its coffers. As companies are increasing their cash in preparation for a possible investor flight, Commtouch is burning whatever cash has been left in its coffers since its flotation. As of Q3, the company has been eating up $14 million per quarter (although it expects to burn only $8 million next quarter), and has now been left with only $42 million.
Commtouch currently focuses on a channel-based strategy, rather than a mail box-based one. Companies such as Intel sign distribution agreements with Commtouch for marketing e-mail boxes and other messaging services Commtouch provides their customers. According to Mantel, “50% of our new backlog of orders come from corporations, which improves revenue quality over time.”
In addition to developing new distribution channels, Commtouch is trying to break into two new markets: application service providers (ASP) and the small and medium-size businesses (SME). ASPs have many customers who receive e-mail services as part of their service package, and outsourcing saves service providers the cost of maintaining customers’ e-mail boxes.
Unfortunately for Commtouch, it is not the only player on the market. It has a big competitor with an impressive record: Critical Path (CP). CP issued only six months before Commtouch did, but its quarterly sales already amount to $45 million.
”We’re both reading the market and going for the same market segments. We’re closing the gap with CP, and the gap in e-mail services is no longer that big,” Mantel says.
”Globes”:But the gap between you is widening. CP is expected to post sales of $55 million next quarter.
Mantel:”I’ve no obsession about CP. We’re building a big business, and we’ll narrow the gap through our channels without wasting money on opening offices in various location around the world. CP deals in other sectors apart from e-mail, which is why it sells more. As far as e-mail is concerned, I believe we’ll going to win.”
Published by Israel's Business Arena on 26 October, 2000